Where's the lifeline for techs?

JulieRannazzisi

NEW YORK (CBS.MW) -- Tech stocks just can't seem to get it right these days.

Enfeebled by seemingly never-ending rounds of profit warnings, the Nasdaq has fallen eight out of the last 10 trading sessions and seen 8.5 percent of its value lopped off since the start of the month. Investors are worried that companies won't be able to deliver the same smashing earnings reports they had become accustomed to in recent quarters.

A number of cross currents have been influencing investors' perception of the market, effectively stifling potential buyers. Is the economy too strong for its own good or are we slowing faster than most believe?

On one side, investors fret that stocks -- read tech companies -- just won't be able to deliver the kind of growth that can justify current valuations. Six Fed rate hikes and climbing energy prices are finally taking their toll on the bottom line in corporate America. The larger-than-usual number of negative pre-announcements this quarter versus last year has made this clear.

On the other hand, participants worry that the taut labor market -- the unemployment rate remains at 30-year lows -- will keep the Fed on high alert on the interest-rate front and that the economy could be heading for a hard landing.

There's tremendous uncertainty on whether the landing for the U.S. economy will really be a "soft one," said John Zimmerman, director of growth strategies at Banc of America Capital Management.

"It's not a constructive environment for stocks," he remarked.

Still, recent economic data have supported the "soft landing" scenario -- which implies that good growth can coexist peacefully with low inflation. So why can't the market take solace in this?

"If the inflation outlook remains positive and earnings growth continues at a decent -- albeit more subdued -- pace, it's a good backdrop for the market and it will be an opportunity to pick up stocks [at better prices]," said Mike Holland, president of Holland & Co.

The Nasdaq fell 8.5 percent this week and is down 17.4 percent for the year. But the index remains 10.5 percent from its 2000 low of 3,042, set on May 24. Amid the tech turmoil, the Dow Industrials was nearly flat for the week, falling just 0.5 percent. The blue-chip barometer is off 7.8 percent on the year. And the S&P 500, a measure of the broad market, lost 1.9 percent of its value this week and is down 4.2 percent in 2000.

Earnings and data watch

The third-quarter earnings season kicks off in earnest next week. Three Dow stocks -- International Paper, General Motors and General Electric -- will be revealing their quarterly results.

First Call notes that even though negative pre-announcements are more than usual, the impact on aggregate estimate revisions has been relatively mild, with expectations for earnings growth trimmed no more than the normal amount. Still, First Call notes that it's likely the reasons for many of the third-quarter shortfalls will have a wider and deeper impact on fourth-quarter results.

The number of negative pre-announcements currently stands at 351, up 25 percent from the same time last year. Expectations for third-quarter growth in S&P 500 companies are now at 15.9 percent versus the 18.8 percent growth rate expected on July 1.

Friday's trading activity

The recent deluge of profit warnings and a solid employment report dealt a major blow to the market averages Friday. The Nasdaq licked its wounds, falling 3.2 percent and closing at its lowest level since May 26.

"The whole market is being painted with the same brush," said Barry Hyman, chief investment strategist at Weatherly Securities. "The financials are now withering away with nasty action across the board."

"We're all hoping that the upcoming earnings reports will be the catalyst for an improvement [in sentiment]," Hyman added.

In fact, with expectations lowered by the onslaught of warnings, the market may be able to actually gain some ground once the quarterly reports are unleashed.

Action like the one being witnessed on Friday is what cleanses the market and prepares it for its next advance, Hyman observed. "But right now, individuals are apathetic and the averages can't hold gains for more than a day."

Inside the tech segment, Internet, chip and networking shares saw the more aggressive selling pressure. In the broad market, all sectors -- with the exception of the defensive utilities -- fell deep in the red. And the interest-rate sensitive financials took a veritable beating, with brokerage stocks tumbling. Also sharply lower: biotech and retail stocks.

The Dow Jones Industrials Average
DJIA, -0.34%
tumbled 128.38 points, or 1.2 percent, to 10,596.54 after falling as much as 206 points at its nadir during the trading session.

"People were starting to get into a party mode on the Fed," said Zimmerman of Banc of America Capital Management. Friday's jobs report, he said, makes it more unlikely for the Fed to shift to a neutral stance on rates when it meets in November.

"Investors are being rewarded to sell on weakness. It's a different market compared to the one we've seen in recent years, when the buy-the-dip mentality ruled," Zimmerman said. "This is a market where you have to be nimble."

Holding the Dow down Friday were steep losses in shares of Citigroup, Home Depot, AT&T, American Express and J.P. Morgan. And AT&T and Eastman Kodak touched fresh 52-week lows during the trading day. Among the upside movers were shares of Alcoa, IBM and Procter & Gamble.

AT&T
T, +1.39%
fell 5.4 percent to $27.31. The company saw its shares downgraded by Salomon Smith Barney to an "outperform" from a "buy." See Rating Revisions.

The Nasdaq Composite
$COMPQ
subtracted 111.06 points, or 3.2 percent, to 3,361.04 after falling as much as 158 points during the session. The Nasdaq 100 Index
$NDX
lost 112.38 points, or 3.3 percent, to 3,311.94.

Volume came in at 1.15 billion on the NYSE and at 1.86 billion on the Nasdaq Stock Market. Market breadth was horrible, with decliners squashing advancers by 20 to 9 on the NYSE and by 29 to 11 on the Nasdaq.

Separately, Trim Tabs said all equity funds posted inflows of $2.3 billion over the week ended Oct. 4 versus outflows of $3.8 billion in the prior week. Equity funds that invest primarily in U.S. funds saw inflows of $2.4 billion compared to outflows of $1.4 billion during the previous week.

Inside the jobs report

Non-farm payrolls rose by 252,000 in September versus the 235,000 expected by a survey of economists conducted by CBS MarketWatch.com. See full story.

"This report screams soft landing, especially when you adjust the numbers for the special effects [from Verizon and the census workers]," said Stuart Hoffman, chief economist at PNC Financial Services. "It's a very neutral report that [should] keep the Fed on the sidelines."

But the jobless rate fell to 3.9 percent in September, a 30-year low, compared to the 4.1 percent expected, which was also the rate seen in August.

The drop in the jobless rate is what's causing some concern in the market but, Hoffman added, it's been between a 3.9 to 4.1 percent range for the past months and hasn't broken out to new lows.

The employment report's closely-watched average hourly earnings figure rose by 0.2 percent versus the anticipated 0.3 percent rise. But September average hourly earnings were upwardly revised to show a 0.4 percent increase from the previously reported 0.3 percent.

"We're seeing a trend of solid -- but not alarming -- job growth," Hoffman noted. "The economy is doing well, with a tight labor market but no signs of inflation. The silver lining is the [paltry] growth in average hourly earnings."

Within the payrolls figures, growth stood at 204,000 excluding the effects of the census workers and the Verizon strike. Job creation got its strength from the service sector in September, where 289,000 jobs were added. For 2000, average monthly payroll gains stood at 192,000 versus the 229,000 monthly average in 1999.

Sector movers

The financial sector was the hardest hit within the broad market, with the S&P Bank Index
BIX, +0.00%
off 3.2 percent while the Amex Securities Broker/Dealer Index
$XBD
plunged 5.5 percent. Speculation that losses in high-yield bond portfolios were triggering asset liquidations among the brokers hurt the sector.

"When the market falls, many firms begin to experience stress. And with the economy slowing, credit risks increase," Hyman said.

Bear Stearns
BSC, +0.00%
was among the hardest hit, sliding 8 percent to $58.38 after rating agency Standard & Poor's revised its outlook to "negative" from "stable." Also in a rut were shares of Charles Schwab
SC.H, -12.50%
down a heady 9.8 percent to $31 and Merrill Lynch
MER, +0.63%
off 7.7 percent to $61.19. Among the bank stocks, Chase Manhattan
CMB, +0.00%
saw its shares fall to a fresh 52-week lows and ended down $1.56 to $42.88.

In the meantime, profit warnings aren't letting up. Chip and optical equipment maker Veeco Instruments
VECO, -1.20%
said Friday it sees third-quarter earnings-per-share of 18 to 22 cents, well below the First Call estimate of 40 cents a share. Moreover, the firm's president and chief operating officer, Christine Whitman, resigned. The stock nosedived $34.97, or 34.1 percent, to $67.56. See full story.

Computer hardware stocks, badly bruised on Thursday, saw additional losses Friday. The Goldman Sachs Computer Hardware Index
$GHA
fell 1.3 percent. But Dell Computer
DELL
inched up 13 cents to $25.31 following its near 11-percent plunge on Thursday in the wake of its earnings warnings and Apple Computer
AAPL, -0.15%
which saw its shares halved last Friday following its earnings warning, rose 13 cents to $22.19.

Internet stocks got clobbered for a second straight session, with bellwether Yahoo
YHOO
reaching a new 52-week low of $79.44 and ending down 4.1 percent to $81.25. The company will unleash its results next week, with First Call estimating earnings-per-share of 12 cents a share. And Priceline.com
PCLN
decimated over the past week, fell another 4.3 percent to $5.56. Amazon.com
AMZN, -0.05%
slid 6 percent to $31.56 after being downgraded by Janney Montgomery to a "sell" rating from a "hold."

It was another ugly day for business-to-business stocks, with Merrill's B2B Holdrs
BHH
erasing 3.3 percent, led by a 23.9 percent plunge in shares of VerticalNet
VERT
The stock saw its price target rating lowered by Wedbush Morgan Securities to a $30 from $50. See related Pulse item.

Treasury action

Bond prices recovered Friday after an early downdraft as plunging equity prices produced a bid in the government market. The 10-year Treasury note gained 14/32 to yield
TNX, -0.73%
5.80 percent while the 30-year bond put on 24/32 to yield
TYX, -1.20%
5.845 percent. See Bond Report.

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